Planned Giving for Financial Advisors
Charitable Lead Trust — Frequently Asked Questions
Will my client be able to claim an income tax deduction when she sets up her Charitable Lead Trust?
Maybe. If the trust is structured as a "grantor" CLT, your client will be eligible to claim an income tax deduction in the year she set up her trust. However, that means that all of the trust income in following years will be taxed to her as well.
Most donors structure their CLTs in a way that does not yield a current income tax charitable deduction so that they don't have to worry about income tax issues in the future, but in some circumstances it can be helpful for your client to take the deduction and assume the future tax liability. In both cases, donors are able to provide wonderful support to Harper College Educational Foundation and to pass trust appreciation to their families free of gift and estate tax.
We can provide you and your client with information that will assist in deciding which type of CLT will work better for her.
Can my client name her grandchildren as beneficiaries of her Charitable Lead Trust?
Yes, your client may name her grandchildren as beneficiaries. However, careful thought must be given to structuring the CLT to minimize potential generation-skipping transfer tax. As a general rule, a Charitable Lead Unitrust is the appropriate vehicle to use if grandchildren are to be named as remainder beneficiaries. Charitable Lead Annuity Trusts should be avoided.
How long will my client's Charitable Lead Trust last?
There is no minimum or maximum CLT term under federal law, although applicable state law may require such a trust to end eventually (typically after several decades). However, to maximize the benefit to Harper College Educational Foundation and minimize transfer taxes, we can help you determine the optimum term to accomplish your client's goals.
Generally, the longer the term, the lower the taxable gift to the donor's remainder beneficiaries and the higher the benefit to Harper College Educational Foundation. An average CLT is often set at 20 years.
What assets should my client use to fund her CLT?
The most beneficial assets for tax-planning purposes are cash and rapidly appreciating assets, such as business interests, because the appreciation in a CLT will pass free of gift and estate tax to your client's heirs. Real estate is not an ideal asset to give to a CLT because the trust is required to make annual distributions of trust assets to Harper College Educational Foundation, and we cannot accept partial interests or joint ownership in real estate. Because a CLT is a taxable trust, it is usually not ideal to contribute highly appreciated assets. Should the CLT need to sell them to diversify its portfolio, capital gains tax will be due from the trust, reducing what can eventually be passed to heirs.
When will my client typically want to establish a CLT?
A CLT is an excellent planning option for your client when she wants to provide funding to Harper College Educational Foundation now and maximize the inheritance of children or grandchildren later. When a well-formulated CLT terminates, the heirs receive the assets at substantially reduced gift and estate tax rates and can use the assets for a wide range of purposes. CLATs are frequently used as part of the exit strategy prior to the sale of a closely-held business or for succession planning of a family business.